A M a g a zine for a ir line e xe c u t i ve s Ta k i n g
y o u r
a i r l i n e
t o
2011 Issue No. 2
n e w
h e i g h t s
The
Jewel
A Conversation With …
Muhammad Ali Albakri,
Chief Information Officer,
Saudi Arabian Airlines,
Pg. 24
18 Comair Limited adopts a variety of
new technologies
40 The European Commission invests in
modernized air traffic management
system
56 The most successful airline connects it’s entire
organization, end to end
Airline
Merchandising Evolution
Photos: Shutterstock
Airlines can help ensure business travelers embrace ancillary products
As the industry embraces the era of ancillaries, technology keeps pace,
delivering the best of both worlds to help airlines and corporate travel
programs achieve their respective goals.
By Shelly Terry | Ascend Contributor
CHALLENGES IN CHINA
A new competitor — high-speed rail — impacts airlines serving China
As high-speed rail continues developing across China, the country’s airlines are gearing
up to the challenges ahead from this new mode of transport.
By Peter Berdy I Ascend Contributor
ASCEND I INDUSTRY
State Of HSR
China already has the world’s largest HSR
network dedicated to passenger transport. Its
rail expansion will be the biggest and fastest
rail expansion the world has ever seen. The
first HSR line opened in 2007 and grew to
8,358 kilometers (5,200 miles) by the end of
2010. This network is targeted to reach more
than 13,000 kilometers (8,100 miles) by the
end of 2011, and at least 25,000 kilometers
(16,000 miles) by the end of 2015, enough
to stretch from Beijing to London and back.
Plans are to extend the network even further
to possibly 45,000 kilometers by 2020.
By 2013, 50 percent of cities on the
planned network will be connected to the
HSR grid. China’s Ministry of Railways’ vision
is to have the HSR network connect all
provincial capitals and cities with populations
over 500,000 by 2020. The network would
be accessible to 90 percent of the Chinese
population.
In this time horizon, neighboring provincial
capitals would be only one to two hours
apart, and provincial capitals would be only
a half to one hour apart from other cities
in their province. If economic growth and
HSR development takes place as planned,
many cities in west and central China facing
economic difficulties will be revitalized by the
HSR system.
Some HSR hub cities could even see
passenger flow growing by as much as 10
times in the coming decade, making them
strategically important targets for development including hotels, catering, logistics and
properties.
Key elements of this expansion are speed
and the technology used by HSR. Airlines fly
at 478 kilometers per hour between Beijing
and Shanghai versus 300 kilometers per hour
by HSR. Easier access to HSR makes door-todoor travel time about equal between the two
modes of travel on this key route.
China has enjoyed technology transfer and
manufacturing capability of HSR systems due
to the eagerness of foreign manufacturers
to enter China’s huge and lucrative market.
Japan’s Kawasaki Heavy Industries, France’s
34 ascend
Alstom, Germany’s Siemens and Canada’s
Bombardier contributed technology that went
into China’s HSR trains, which are now all
made in China.
The rapid development of HSR is a key
enabler to stimulate China’s economy.
“We went through 30 years when [rail]
development fell behind the national rate
of growth, so now we have to go faster,”
said Yang Zhongmin, director general of the
Ministry of Railways development and planning department.
China looked to public investment in rail
construction to stimulate growth when the
global financial crisis hit in 2008. A good part
of China’s total fiscal stimulus package was
spent on transport and most of that was on
rail.
HSR is a costly investment. The recently
opened Beijing-Shanghai route cost US$33
billion to build. China’s total investment in
high-speed rail to 2020 had been estimated
at about US$300 billion, but recent reports
indicate that more than US$600 billion is
likely to be spent on rail construction during
the 2011-2015 five-year plan alone. However,
if the economic objectives are realized, the
effects on business and freight, as well as
savings in energy costs to move passengers,
may very well balance out the extremely
high construction costs to develop the HSR
network.
Economic Impact
China is counting on the HSR network
to aggressively improve market access,
facilitate population mobility, improve logistics efficiency and shrink China’s geographic
and economic disparities. Development of
China’s railway network should move travelers around the country in large numbers
at unprecedented speeds. Smaller cities in
the interior should grow in importance as
travel will enable longer-distance trips and job
creation.
However, critics of HSR indicate the uptake
may be longer than expected. Many Chinese
will continue to take slower, cheaper trains.
“China’s per capita income is still relatively
low and so is the economic value of time,”
Percent System Exposure to HSR Based on Departures
China’s Ten Largest Airlines (September 2011 Schedules)
98%
100%
86%
90%
80%
Percent Domestic of Total System Departures
A
s China unveils its high-speed rail
(HSR) network over the coming
decade, airlines are faced with
adapting to this new competitor.
HSR will offer consumers a new
choice of travel. Their decision
to select air or rail will be made based on
availability, travel time, convenience and cost.
Airlines will need to deal with added capacity and price pressure from HSR. Competition
is expected to be fierce in short-distance
markets where HSR offers a distinct time
advantage. The battle will also take place in
medium-distance markets where the advantage of HSR is lessened.
75%
69%
75%
78%
81%
78%
71%
70%
32%
33%
54%
65%
Xiamen
Shandong
Tianjin
800-1500 km
<800 km
59%
60%
43%
50%
39%
50%
43%
56%
56%
37%
16%
19%
32%
25%
32%
22%
22%
44%
Hainan
China
Southern
Sichuan
China
Eastern
Shanghai
Airlines
Shenzen
50%
40%
30%
20%
10%
0%
Air China
Airline Exposure To HSR Sabre Airline Solutions analyzed published schedules for September to determine China’s top 10 airlines’ potential network exposure to HSR as a percent of their total
operations (domestic and international). Two categories were examined using distance bands typically
used to compare competition between the two modes of travel: highly competitive (operations less
than 800 km) and competitive (operations between 800 km and 1,500 km). Combining both categories,
departure exposure to HSR ranges from 59 percent to 75 percent. In the highly competitive category,
Air China is the least exposed (16 percent of departures), and China Eastern and China Southern are
twice as exposed.
ASCEND I INDUSTRY
Zhao Jian, an economics professor at Beijing
Jiaotong University, wrote in the China Daily.
“Cheap travel with basic comfort suits ordinary Chinese passengers who do not want
to spend three times as much for high-speed
tickets just to save a few hours of travel
time.”
Professor Zhao Jian believes highspeed rail will be unaffordable for most
people and that his views have been
proven by serious losses incurred on new
HSR lines. He asserts that China will face
huge economic, social and political risks
due to rail development and that a major
debt crisis is looming that could become
a serious drag on economic development.
If HSR development unfolds as planned,
the result should be a more mobile work
force with growing markets that are easier
to access. In turn, this would stimulate
business and economic development. By
the numbers, the HSR network should
connect more than 250 cities and regions
covering a population of 700 million with
the potential to moving 4 billion passengers annually by the year 2020.
China’s major cities are likely to get
even bigger. As a result of mobility, connectivity to the HSR network and reduction
in travel times, large cities within proximal distances will continue to expand
and their boundaries will blur to create
connected mega-metropolitan regions. A
Morgan-Stanley research report indicates
six super-city clusters within three hours
by HSR are likely to develop by 2020, with
catchment populations ranging from 67
million to 220 million. As a result of HSR
connectivity, the report identified eight
emerging hub cities are likely to experience
strong growth.
“One of the reasons we built the line
was to help boost economic development and business in provinces along
the route,” said Zhao Guotang, deputy
general manager of the Beijing-Shanghai
High Speed Railway Co. New houses,
offices and hotels have sprouted up along
the Beijing-Shanghai corridor.
Enhanced mobility created by HSR is
already changing China’s economic and
business landscape. Real estate prices
and investment have surged at China’s
inland cities that have already been connected by high-speed rail in the last three
years. Businesses are flocking to these
cities, now just a few hours by bullet train
from China’s busiest and most international
metropolises.
Construction of new HSR lines has had
a strong economic effect in the short term,
creating jobs and increasing demand for
construction, steel and cement. Railway
construction fueled the demand for 20
million tons of steel and 120 million tons
spent on railway could generate three dollars
in investment.
“In terms of a whole region, railways will
promote investment along the line in a noticeable way.” he said.
Others believe HSR payback will take
years.
“Typically for infrastructure, healthy building should outpace demand by two to three
years,” said JP Morgan rail analyst Karen Li.
“For high-speed rail, at this point, we may be
looking at 5 to 10 years ahead of demand, in
my view.
Another concern is that China is incurring heavy debt along the way. Existing
HSR projects, the Beijing-Tianjin line in the
north, Wuhan-Guangzhou in the south and
Zhengzhou-Xi’an in central China, will all face
difficulties breaking even, according to Zhao
Jian.
of cement in 2010. The Beijing-Shanghai
route used about 110,000 workers while
the HSR line was being built.
HSR is having a substantial impact on
urban development as well. Local communities connected to the HSR grid are investing
in projects such as new roads to connect to
HSR stations, providing easy access to ground
transportation by building new subway lines,
adding bus service and new parking facilities
as well as upgrading infrastructure such as
new hotel construction in anticipation of
new tourism and traffic. An added benefit of
developing new subway lines that reach new
HSR stations should help to alleviate local
traffic congestion and stimulate growth in
urban centers.
At Qufu, the birthplace of Confucius, the
new HSR station integrates a travel agency,
airport ticketing and transfer services, hotel
bookings, and transport information. In addition, roads and infrastructure have been
upgraded to connect the city’s main tourism
areas to the HSR station.
“Everyone is talking about the arrival of
the bullet train,” said Zhang Mingzhe, a city
government spokesman. “They all want to
see how it will boost investments, job opportunities and property prices.”
Wang Shuang, an analyst with Industrial
Securities in Shanghai said that every dollar
HSR Imact On Freight
While HSR will only carry passengers
and not cargo, it will play an important role
by freeing-up capacity for freight growth.
As passenger traffic switches to new HSR,
older rail services are made available for
transporting freight, allowing for faster and
cheaper transport of raw materials, such as
coal and wheat, as well as finished products
from Chinese factories to shipping docks. The
Comparison of Lowest Economy Air Fares vs. HSR Second Class Fare
July 2011 (air fares include fuel surcharge and airport departure fees)
1000
900
800
700
600
500
400
300
200
100
0
ing
nk
ha
ng
a
Sh
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i-N
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km
98
(2
ij
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km
71
(3
an
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ing
nk
Na
a
Ch
-G
u
g
an
ou
an
km
38
(7
Jin
g
an
Sh
iha
W
Gu
n-
a
uh
ou
km
21
(8
zh
g
an
)
)
)
km
57
(5
zh
ha
s
ng
)
km
56
(5
g-
ijin
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kin
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7
km
i(
ha
g
an
9
10
Sh
g-
in
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km
0
2
(9
B
Airlines Cut Prices Airlines have cut fare prices to compete with HSR. Even the deepest discounted
fares are higher priced than HSR, especially on short routes.
ascend 35
ASCEND I INDUSTRY
Connecting Cities Via Rail In less than two years, 50 percent of cities on the planned network will
be connected to the HSR grid. By 2020, the HSR network is expected to connect all regional capitals
and cities with populations of more than 500,000, making the network accessible to 90 percent of the
Chinese population.
result will also impact roadways since it will
be cheaper to switch to rail transport instead
of using trucks to move heavy cargo across
the country.
Effect On Airlines
After benefiting from years of strong
growth and a lack of effective alternatives,
China’s airlines are facing a serious challenge.
China is investing heavily in a modern ground
transportation system including new subways
and new bus services that offer easy access
to the HSR network. HSR trains are more
comfortable than planes. HSR is cheap by
comparison to air and is far more punctual
as well. Additionally, air service requires time
consuming arrival, check-in and long boarding
procedures (most service on Beijing-Shanghai
is wide body). It is also more expensive and
plagued by on-time performance problems.
One in four flights in China experience delays.
Experience in Europe and Japan shows
that HSR takes a substantial market share
from airlines. HSR is highly competitive with
air service under 800 kilometers and is competitive with airlines at distances from 800 to
1,500 kilometers according to Morgan Stanley
transportation analyst Edward Xu.
China’s airlines are aware of the potential
impact. In several instances, airlines have
been forced to cut back frequencies on shorthaul sectors due to HSR. Prominent examples
are from Wuhan in central China (population
of 10 million). Nearly 70 percent of flights less
than 600 kilometers have been suspended
after HSR was introduced between Wuhan
36 ascend
and Guangzhou. Wuhan-Nanjing air service
ceased operations at the end of the first quarter, resulting from intense HSR competition.
The number of flights between Changsha
and Guangzhou (705 kilometers) was reduced
from 12 to three per day due to a stop at
Changsha on the Wuhan-Guangzhou HSR.
Hainan Airlines and Shenzhen Airlines withdrew from the market, leaving China Southern
as the only airline with service. Fares were
reduced by 15 percent, but air passenger
numbers have still declined by 48 percent to
390,000 during 2010.
The director general of the Civil Aviation
Authority of China (CAAC), Li Jiaxiang, indicated half of flights less than 500 kilometers and
about 20 percent of flights between 800 kilometers and 1,000 kilometers could become
unprofitable as a result of HSR competition.
CAAC Vice Minister Wang Changshun said
earlier this year the Beijing-Shanghai highspeed line would be “another blow to the air
transport industry.”
Air China, China Southern and China
Eastern Airlines have all acknowledged the
threat of HSRs, but have echoed CAAC comments that the threat is focused on sectors
below 800 kilometers.
Estimates of the revenue impact on
airlines resulting from lower prices and fewer
passengers due to HSR are in the neighborhood of CNY10 billion (US$1.5 billion) by
2012. One estimate suggests up to 9 percent
of passengers could shift from air to rail
transport by 2016.
To remain competitive, airlines have cut
prices. After HSR began operating the BeijingShanghai route, the cheapest airline ticket
was 360 Yuan (US$56) before airport fees and
fuel surcharge. Even at the deepest discount
fares, airfare is more expensive versus HSR,
especially at short distances.
“There will be plenty of travelers willing to
switch to trains as they can’t stand any more
airline delays,” said Jack Xu, an analyst with
Sinopac Securities Asia in Shanghai.
“Bullet trains will definitely lure some passengers from carriers,” said Li Lei, an analyst
with China Securities Co. “Airlines will have
to assign smaller planes to the route or offer
better ticket prices.”
China Eastern expects Beijing-Shanghai
HSR to affect as many as 10 of its routes
from Shanghai’s Hongqiao airport, including
services to Beijing, Tianjin, Jinan and Xuzhou.
China Southern will eventually have a
quarter of its domestic network affected by
HSR. China Southern’s chairman, Si Xianmin,
said of the carrier’s 160 domestic routes, 38
are in direct competition with high-speed rail
with potential traffic declines of greater than
50 percent on 418 of its approximately 1,700
weekly services.
“Airlines will lose all their current competitiveness, like saving time,” he said.
Air China’s chairman, Kong Dong,
expressed concern about the BeijingShanghai HSR service, noting that the route
“is our lifeblood.” However, the airline
is less exposed to HSR competition than
other airlines. Air China’s manager of investor relations, Rao Xinyu, estimates China’s
HSR development would have a minimal 2
percent to 3 percent impact on its network.
On domestic routes, Rao stated less
than 10 percent of the carrier’s revenue is
generated from sectors under 800 kilometers, while the carrier’s routes under 1,000
kilometers are focused in the southwest,
northern and northeast regions, which have
minimal impact from HSR.
“There is no point competing headto-head with high-speed rail,” said Wang
Zhenghua, chairman of low-cost carrier Spring Airlines. “We will stop our
Shanghai-Wenzhou,
Shanghai-Wuhan,
Shanghai-Fuzhou and other shorter flights
in stages.”
Spring has started services to Japan
and intends to be an active player in other
regional international markets.
Beijing-Shanghai High-Speed Rail
The showcase 1,318 kilometer BeijingShanghai HSR opened June 30, a year
ahead of schedule.
The CRH380 (China Rail High designed
for speed of 380 kilometers per hour or 236
miles per hour) trains used on the route are
built by Beijing-based CSR.
ASCEND I INDUSTRY
All HSR tickets have standard prices.
There are no discounts during periods of low
demand. However, prices may be set higher
during key travel dates or holidays such as
Spring Festival. Train tickets must be purchased online, at railway station ticket offices
or at a designated agency no more than 10
days in advance. There is no name printed on
the ticket. Refunds are made at the railway
station, and usually passengers must pay an
administrative fee of 20 percent or 50 percent
for cancellations. Designated agencies have
right to sell railway tickets but cannot issue
refunds or provide other services.
Railway tickets are not offered through
China’s TravelSky reservations system.
Currently, a one-way second-class ticket
on Beijing-Shanghai HSR costs 555 Yuan
(US$86). HSR ticket prices for first class are
935 Yuan (US$145), and 1,750 (US$270) for
business class. The price of a second-class
HSR ticket is equivalent to about 35 percent
of monthly disposable income for urbanites.
“Distribution has improved substantially on
HSR since the Beijing-Shanghai route started,” said Florence Zhong, sales director in
China for Sabre Travel Network®. “Previously,
travelers had to go to the train station or to a
designated train agency to purchase tickets.
Now online purchase has provided an additional channel for distributing train tickets.
However, it will still take time to integrate
HSR into airline distribution systems.”
Current HSR fares will attract many travelers on short-distance journeys; however,
business travelers are not as price sensitive,
so they will choose the most efficient way
to travel.
“For many Chinese travelers, ticket prices
on HSR may still be considered relatively
expensive, and there are other options available such as regular trains and buses,” said
Zhong.
Airlines Fight Back
Beijing-Shanghai is one of the largest city
pairs in the world for air travel and is an
important business market. It is among the
most profitable domestic city pairs for China’s
airlines. The average load factor on the route
is 85 percent.
Currently, there are 47 daily round trips
between Beijing and Shanghai, of which 39
operate from Shanghai’s Hongqiao airport
and the other nine from the international
airport of Pudong, further away from the city
center than Hongqiao. Twenty-eight flights
are operated by China Eastern Airlines and
its newly acquired affiliate Shanghai Airlines.
Air China, the second-largest airline on the
route, operates 16 flights. Total daily airline
capacity is just over 12,000 seats each way.
More than 80 percent of departures are on
Photo: Boeing
Distribution And Pricing
Photos: ImageChina
HSR stations are located close to city centers and offer ease of access to Beijing and
Shanghai residents and nearby areas when
combined with subway and bus service.
Beijing’s South Station is six kilometers south
of Tiananmen Square. Shanghai’s operations
are from the Hongqiao station, next to the
city’s main domestic airport. Shanghai’s financial district of Lujiazui is a 40-minute subway
ride away.
The Beijing-Shanghai HSR creates a
north-to-south trunk route that connects to
east-to-west rail lines at two dozen stations
along the way.
“It’s the network together that makes it
work — knowing you can go from Shijiazhuang
to Beijing and then transfer to Tianjin, so the
coal guys can go to the port and conduct
business with their shippers, for example,”
said John Scales, a rail expert in the Beijing
office of the World Bank.
There are three different HSR services
operating on the route, with higher fares for
the fastest services. The fastest takes four
hours and 38 minutes, including a single
two-minute stop at Nanjing. A second service
will stop at Nanjing and Jinan and will take
four hours and 55 minutes. The third service
will stop at seven to eight stations along the
route and will take 38 minutes longer than the
fastest service.
Each stop along the route takes two minutes. The largest HSR trains between Beijing
and Shanghai have 16 cars: 10 for second
class, four for first class, one business car
and one dining car. In addition, there are a
handful of VIP sightseeing seats just behind
the train drivers. The total number of seats in
these trains is 1,066.
There are two VIP sightseeing areas that
are configured with two seats that can
become fully flat at the touch of a button. The area also has sofas as well as
multi-functional entertainment equipment.
Passengers can see scenery in the same
bird’s eye perspective as train drivers.
Business class cars are the premium
service offering and have the most space
and comfort. These cars have widely spaced
leather seats with three seats per row. The
seats can rotate as well as become a full flat
bed. Each seat is equipped with a foldable
LCD TV, a tray table, socket and reading
lamp.
First-class seats are very spacious and
can rotate 180 degrees. There is a system
for news, music and video. Rows of roomy,
adjustable seats in second-class cars are
arranged two plus three across. Each seat
row in first- and second-class has electric
sockets for charging mobile phones, computers and other devices. WIFI will be installed
in the trains. Passengers can use the phone
or Internet, something not possible on many
flights.
Stiff Competition China’s bullet trains are expected to lure a number of passengers from airlines.
As a result, carriers may have to assign smaller aircraft to specific routes or offer lower ticket
prices.
ascend 37
ASCEND I INDUSTRY
wide-body airplanes such as Boeing 777 and
Airbus A330, which have just over 300 seats.
By comparison, there are 34 daily HSR
round-trip services between Beijing and
Shanghai, offering up to 36,000 daily seats
each way with each train having a capacity of
more than 1,000 seats per departure.
China Eastern and Air China are taking
dramatic steps to minimize market share
loss. They have added frequency, streamlined passenger check-in, created dedicated
check-in counters and security channels, and
implemented additional services such as accelerated baggage claim areas for passengers.
They have also added free shuttle buses
to and from the airport. According to Beijing
News, airlines are expected to park a spare
plane at both airports. They will also assign
guides at airports to help passengers arriving
late get on board in a short period of time. Air
traffic control departments are being urged
to give priority to Beijing-Shanghai flights
when circumstances affect schedules, such
as thunderstorms or military maneuvers.
Paradoxically, there will also be cooperation
between air and rail. Airlines will put passengers on fast trains if flights are seriously
delayed or canceled.
China Eastern offers services such as
online check-in and the ability to book trips
weeks in advance to help retain business
travelers. It also plans to make travel more
flexible by allowing passengers to fly into
Shanghai and then leave from another city at
no extra cost.
To compensate for exposure to HSR,
China’s airlines are looking to international markets. China Southern is accelerating the pace
of its international expansion and intends to
increase international operations to 30 percent
of total routes by the end of the year and to 40
percent over the medium term.
“It’s part of the efforts to build up and
enhance our long-haul flights on our global route
network,” said Kong Fansheng, the carrier’s vice
president of its Beijing branch. “We have set
up a tri-hub international route map based on
Guangzhou, Beijing and Urumqi.”
China Eastern is also increasing focus on
international markets. Chairman Liu Shaoyong
has said high-speed rail will make it difficult for
shorter air routes to be profitable. He stated
the airline would “step up its exploration of the
global market.”
Taking the “if you can’t beat them, join them”
approach, the airline’s deputy general manager,
Li Junalso, said airlines should “seek cooperation
with high-speed railways to explore international markets they can’t reach.” Railway officials
signed an agreement with China Eastern to integrate services in the future. The Beijing-Shanghai
HSR will establish a combined transport service
at the Shanghai station with China Eastern,
enabling passengers to transfer from railways
to airplanes without taking other transportation.
38 ascend
HSR Expansion The expansion of China’s high-speed rail represents the world’s largest HSR
network dedicated to passenger transportation. The network is targeted to reach more than
13,000 kilometers (8,100 miles) by the end of 2011, and at least 25,000 kilometers (16,000 miles)
by the end of 2015. Future plans include extending the network even further to possibly 45,000
kilometers by 2020.
Passengers from Tokyo, Seoul, Chinese
Taipei and Hong Kong who travel by air can take
HSR to Wu Xi, Hangzhou and other cities in
Yangtze River Delta region. Passengers will be
able to book tickets both for airlines and trains
at the designated China Eastern Airlines’ site.
In addition, ticket-changing service for the two
modes of transportation will be accessible at
both rail and airline companies.
Air China’s Chairman Kong Dong actually
sees the nation’s high-speed rail network as
both a challenge and an opportunity. He stated
there would be opportunities to cooperate with
high-speed rail, including through codeshare
agreements between airlines and rail.
“Airlines and high-speed railways are not
like water and fire. Each has its own advantage,” he said.
Questions And Concerns
HSR development and safety have been
under criticism almost from the onset. Key
issues include:
The high cost to develop the network,
Top level of corruption and concerns about
construction quality,
Low ridership.
High-speed rail plans have been highly controversial. Some Chinese complain that the
new services are effectively forcing up the
price of rail travel by reducing the number of
cheaper, slower-speed trains.
Professor Zhao Jian has been a longtime
critic of high-speed rail. He believes the cost of
the project might have created a hidden debt
bomb that threatens China’s banking system.
“In China, we will have a debt crisis — a
high-speed rail debt crisis,” he said. “I think it
is more serious than your subprime mortgage
crisis. You can always leave a house or use it.
The rail system is there. It’s a burden. You must
operate the rail system, and when you operate
it, the cost is very high.”
The Railways Ministry’s debt stands at
US$276 billion, almost all borrowed from
Chinese banks. Critics claim that fares are too
expensive and the majority of Chinese need
cheap transportation instead of record setting
speeds.
Part of the cost problem has been that each
segment of the system has been far more
expensive to build than initially estimated.
Many trace high costs directly to corruption
during construction. Earlier this year, China’s
railway minister and deputy chief engineer were
removed from office after auditors discovered
problems with overcharging, unexplained costs
and fake receipts.
The highly publicized HSR accident that
took place in July near the city of Wenzhou
resulted in suspending new HSR construction and recalling problem-plagued trains. The
accident, combined with expert warnings of
costs and dangers, persuaded the government
to scale back development and slow the unsustainably fast expansion. After the accident, the
government announced a speed reduction on
second-tier trains operating at 250 kilometers
per hour to slow to 200 kilometers per hour
and launched a nation-wide safety inspection.
A 5 percent cut in ticket prices was also
announced to boost lagging ridership, along
ASCEND I INDUSTRY
Easy Access High-speed rail stations are conveniently located near city centers and are easily accessible to residents of Beijing and Shanghai as
well as nearby areas when combined with subway and bus service. Beijing’s South Station is six kilometers south of Tiananmen Square.
with a reduction in the Beijing-Shanghai HSR
schedule.
“High-speed railways will lose their competitiveness against airlines after the speed cut,”
said a source from the railway authorities told
the 21st Century Business Herald. “That would
be bad news for the Ministry of Railways,
which is already in huge debt, and for industries
participating in the project.”
In August, the manufacturer announced it
recalled 54 trains following repeated delays
that were blamed on equipment failure.
Going Forward
If safety concerns are overcome and development takes place as originally planned, HSR
will create traffic diversion and apply revenue
pressure on China’s airlines. The shift of passengers from air to HSR could be short term
based on strong historical and projected growth
rates in air travel. China Eastern’s deputy general manager, Li Jun, does not expect the HSR
network to have a major impact. He said the
airline sector is still in a growth stage and the
industry in China still offers tremendous growth
potential. As China’s economy continues to
grow, experts believe there is room for both
types of transportation. Passenger demand is
projected to more than triple by 2020.
Revenue pressure will be permanent.
Airlines must offer deeply discounted fares to
compete with HSR. Airlines will be vulnerable
in high-demand periods where they typically
offer fewer cheap seats and withdraw discount
fares to bring in high revenues. Passengers will
consider cheaper HSR as an option.
Chinese carriers will need to adopt different strategies to avoid direct competition
from HSR. Among them are development
of hub-and-spoke networks, operating longer routes, expanding internationally, and
tie-ups through codeshares and global alliances. On short-distance markets, airlines
will have to look for markets where HSR
will not reach, such as in the southwest
and northwest, or face tough competition
with HSR. To deal with pressures on profitability brought by HSR competition, China’s
airlines will also have to focus on constant
cost control.
China’s airlines have some advantages
versus HSR. In some cases, the higher cost
of air service may not be a determining factor for passengers whose business travel is
paid by their companies. More importantly,
airline frequent flyer programs are highly
valued since they provide a means for families to take vacations.
However, HSR needs to overcome safety
and reliability problems, most importantly, and
regain public confidence. China has 13 highspeed rail lines in operation, with 26 under
construction and 23 more planned. Their current status is unclear.
More than 2,700 years ago, it took Chinese
Philosopher Confucius a week to travel from
his home town of Qufu to Jinan to teach. If he
could travel today, the HSR trip would take less
than an hour. Posters and banners in his home
town read, “High-speed railway changes life.”
There is no question that it will affect the
lives of millions of Chinese and cause ripples in
China’s domestic airline industry.
Morgan Stanley on
China high-speed rail
Peter Berdy is a consultant for
Sabre Airline Solutions®. He can be
contacted at [email protected].
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